labour cost variance

labour cost variance

the difference between the standard DIRECT LABOUR cost of a product (standard labour time x standard wage rate) and its actual direct labour cost (actual labour time X actual wage rate). This difference can be broken down into two parts:
  1. labour efficiency variance, which involves calculating the difference between the standard labour time specified and the actual labour time, converted into money terms by multiplying by the standard wage rate;
  2. labour rate variance, which involves calculating the difference between the predetermined standard wage rate and the actual wage rate, multiplied by the actual labour time.

With this distinction it is possible to trace whether an adverse direct labour cost variance is due to lower labour efficiency or higher wage rates. See STANDARD COST.

Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson